CROSS PRICE

ELASTICITY OF
DEMAND
Definition
The cross-price elasticity of demand is
the degree of responsiveness of quantity
demanded of a commodity due to the
change in price of another commodity.
In other words
Income Elasticity of Demand measures
by how much the quantity demanded
changes with respect to the change in
income.
Mathematical Expression
Practical Example
Tea and coffee are substitutes to each other. If the
price of coffee rises from $.10 per 100 grams to
$.15 per 100 grams.

As a reserve, consumer demand for tea increases

from 30/100 grams to 40/100 grams.

Find out the cross elasticity of demand between

tea and coffee.
Solution
Here, If we suppose tea as good x and coffee as good y.

The coefficient of cross elasticity is

2/3 which shows that the quantity
demanded for tea increases 2% when
the price of coffee rises by 3%.
Another formula

CED xQd = 40 newQd X

– 30 old Qd X / 30x *100
Divide
each to get
CED y Price = 15 new p CED

Y- 10 old p Y / 10old p Y
*100
Types of Cross Elasticity of Demand
1. Positive cross elasticity of demand (EC>0)
2. Negative cross elasticity of demand (EC<0)
Positive cross elasticity of demand
(EC>0)

Rise in price of one good

leads to rise in quantity
demanded of other good
of a similar nature and
vice versa
Negative cross elasticity of demand
(EC<0)

Rise in price of one good

leads to fall in quantity
demanded of its
complementary good
and vice versa
 Substitute
The original Price for good Y= $8
The change in price is $12 dollars for Y
The initial quantity Demand for x = 80
units
the change in quantity demand for x =
100 units
CED= (20/80) / (4/8)
=(1/4)/(1/2)
=2/4
=1/2
CED= (Q2- Q1/ Q2+Q1) / 2
Cross Elasticity of demand
• To learn more visit businesst
opia.net/economics

• To get more resources related to Business

Studies join the facebook group
Fb.com/groups/businessnotes